Why do Venture Capitalists exist?

A notable trend indicates that founders are interested in alternative ways of raising capital that add value to the business other than the monetary value raised. Fundraising is crucial for founders and factors such as the investment size, future decision speed and external expertise is crucial to decide which way of fundraising.

One important way of fundraising is with Venture Capital, which is a type of private equity that invests in high growth potential ventures. Studies show that 43% of US publicly traded companies are backed by a Venture Capitalist (VC) and that that the likelihood of success of a venture increases with a VC. There are both pros and cons with venture capitalists but what factors should founders consider when raising through a VC?

There is substantial evidence that suggests that VCs assist in the entrepreneurial process and that ventures going through a VC are likely to grow faster and consequently have a higher IPO capitalisation share. In comparison to the industry average, a VC adds more value to ventures because of additional non-monetary benefits. There is also empirical evidence that shows that VC backed firms are more innovative and productive. However, studies suggest that there is a relationship between how prestigious a VC is and the growth potential of startups. Therefore, founders should take a VCs reputation and expertise added into consideration whilst deciding which VC to select.

The main advantage with a VC is the amount that is possible to raise. A significant limitation is that VC investment is scarce in comparison to other ways of fundraising such an angel investment. However, over the last decade, the number of VC investment has increased significantly, which makes this kind of investment viable for founders.

Data collected across Silicon Valley startups provides evidence that VC-backed companies are faster to replace founders with an external CEO. Therefore, a major disadvantage with a VC is the loss of control which may consequently change the scope of the business. Therefore, if you are a founder and want to maximise the decision making of your startup a VC may then not be the best source of finance.

VCs typically invest in high-risk startups and because of the nature of the investment which requires a high amount of capital means that founders must give a lot of equity away. These high growth ventures typically undertake milestone investment which means that compared angel investment they give up sustainably more equity.

Want to have a deeper understanding of VCs? Feel free to check AGORA Series and see Matilde Giglio tips on how to fundraise through a VC!